Monday, May 31, 2010

Moodys explains AAA rating on "D" paper

Gerald on the Floor of the NYSE ( center )

Warren Buffett will testify under subpoena before a U.S. panel examining the causes of the 2008 financial crisis.Buffett, Moody's Corp (MCO.N) Chief Executive Raymond McDaniel, and five other current and former Moody's officials will testify on June 2, as the commission examines credit ratings and how investors use them.Moody's is the parent of credit rating agency Moody's Investors Service. Berkshire had a 13 percent stake in Moody's as of March 31, regulatory filings show.SOURCE:

When my auto mechanic told me he was also Mortgage Broker,
( He said they don't confirm income and sub-prime Mortgages were easy to resell at a nice profit.)
this alleged connection between the Federal Reserve and my
auto mechanic, no matter how distant, caused the hairs on my neck to stand up and
my head to throb.
( Maybe it was the oil fumes from the auto garage, but I don't think so.
Gerald )

Moodys then rated the paper my auto mech/mortgage broker originated( a Sub-prime loan ) at AAA credit rating.How did they come to the conclusion it was worthy of a "AAA" and nota "D" rating?They, Moodys assumed the housing market would never go down in price.

I meanWarren Buffett invested in Moodys so they have to be good,but Warren didn't invest in any of the sub-prime paper.

Gerald

The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear. Central banks and governments have so far found no effective way to control, or even monitor, the risks posed by these contracts. In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal. (Berkshire Hathaway annual report, 2002) Warren Buffett...

Buffett's reputation is as a straight shooter. For years he had only contempt for fantasy finance securities that contain nothing but air and risk. He was among the first to see that if we let toxic securities like synthetic collateralized debt obligations run wild, we'd soon be engulfed in a financial crisis. (For an easy to read account of these "financial weapons of mass destruction" please see The Looting of America.)

But times have changed. Today, Buffett is all about the bottom line. He's taken to defending the biggest shysters in the country--and argues that his own questionable derivatives should be shielded from government regulators.SOURCE:

But how could Moodys rate the sub-prime paper AAA, credit swaps?Tom Barnett has a good piece on credit swaps.Backgrounder;

Soon, companies like AIG weren't just insuring houses. They were also insuring the mortgages on those houses by issuing credit default swaps. By the time AIG was bailed out, it held $440 billion of credit default swaps.

So much of what's gone wrong with the financial system in the past year can be traced back to credit default swaps, which ballooned into a $62 trillion market before ratcheting down to $55 trillion last week—nearly four times the value of all stocks traded on the New York Stock Exchange.

The problem was exacerbated by the fact that so many institutions were tethered to one another through these deals. For example, Lehman Brothers had itself made more than $700 billion worth of swaps, and many of them were backed by AIG. And when mortgage-backed securities started going bad, AIG had to make good on billions of dollars of credit default swaps. Soon it became clear it wasn't going to be able to cover its losses. And since AIG's stock was one of the components of the Dow Jones industrial average, the plunge in its share price pulled down the entire average, contributing to the panic.
The reason the federal government stepped in and bailed out AIG was that the insurer was something of a last backstop in the CDS market. While banks and hedge funds were playing both sides of the CDS business—buying and trading them and thus offsetting whatever losses they took—AIG was simply providing the swaps and holding onto them. Had it been allowed to default, everyone who'd bought a CDS contract from the company would have suffered huge losses in the value of the insurance contracts they had purchased, causing them their own credit problems.
( The CDS were shams. fraud, they had no reserves to cover losses, still don't and
they still sell the fake insurance. G )SOURCED FROM:

Credit Default Swaps CDS, have no reserves like insurance companies do to cover losses, the profits from the sales of CDS the companies kept, when they couldn't
cover the losses ( and they had no plan to ever pay defaults, its just FRAUD. G )
The US Government stepped in and paid the claims from tax payer money, the bail out.

The value of CDS still exceed the value of all the stock on NYSE by 400%.
They still sell CDS without any reserves for losses the Wall St. Banks continue
the FRAUD.
And the Companies that buy the CDS can remove that liability from their
books, as they bought Insurance to cover any loss, ( of course everybody
knows the sellers can't cover the losses. But CDS are cheap, and get
rid of bad assets on the books as they bought Insurance against any losses.( abet Fraudulent insurance,) but the Wall St banks make a killing off the sales and the Government will pick any huge losses, and the Federal Reserve allows this CRIMINAL ACTIVITY BY THE WALL ST BANKS.Wall St balance sheets are so baked you need a cork screw to make senseof them. The balance sheets of Wall St Banks are false but legal.Regulators allow them two sets of books.

When does it stop?

Where does it stop?

Neither provided any protection to investors and
both were misleading and fraudulent both leading to
Government bailouts and near market collapse
while principal sellers raked in huge profits from
the fraud.